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Vogl Co. is a U.S. firm conducting a financial plan for the next year. It has no foreign, subsidiaries, but more than half of it sale are form exports. Its foreign cash inflows to be received from exporting and cash outflow to be paid for imported supplies over the next year are shown n the following table:
Currency total inflow total outflow
Canadian dollar (C$) C $32,000,000 C $ 2,000,000
New Zealand dollar (NZ$) NZ $ 5,000,000 NZ $1,000,000
Mexican peso (MXP) MXP 11,000,000 MXP 10,000,000
Singapore dollar (s$) S$ 4, 000,000 8000,000
The spot rate and one-year forward rates as of today are shown below:
Currency spot rate one-year forward rate
C$ $.90 .93
NZ$ .60 .59
MXP .18 .15
S$ .65 .64
Questions
1. Based on the information provided, determine Vogl's net exposure to each foreign currency in dollars.
2. Assume that today's spot rate is used as a forecast of the future spot rate one year from now. The New Zealand dollar, Mexican peso, and Singapore dollars are expected to move in tandem against the U.S. Dollar over the next year. The Canadian dollar movements are expected to be unrelated to movements of the other currencies. Since exchange rates are difficult to predict, the forecasted net dollar cash flows per currency may be inaccurate. Do you anticipate any offsetting exchange rate effects from whatever exchange movements do occur? Explain.
3. Given the forecast of Canadian dollar along with the forward rate of the Canadian dollar, what is the expected increase or decrease in dollars cash flows that would result from hedging the net cash flows in Canadian dollar? Would you hedge the Canadian dollar position?
4. Assume that the Canadian dollar net inflow may range from C $ 40 Million over the next year. Explain the risk of hedging C$30 million in net inflows. How can Volg Co. avoid such a risk? Is there any tradeoff resulting from your strategy to avoid that risk?
5. Vogl Co recognize that its year to year hedging hedges the risk only over a given year and does not insulate it from long-term trends, in the Canadian dollar's value, it has considered established a subsidiary in Canada. The goods would be sent from the United States to the Canadian subsidiary and distribution by the subsidiary. The proceeds received would be reinvested by the Canadian subsidiary in Canada. In this way, Vogl Co would not have to cover Canadian dollars to U.S. dollars each year. Has eliminated its exposure to exchange rate risk by using this strategy?